The Domestic Product is too ‘Gross’

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“Gross National Product counts air pollution and cigarette advertising, and ambulances to clear our highways of carnage.

It counts special locks for our doors and the jails for the people who break them. It counts the destruction of the redwood and the loss of our natural wonder in chaotic sprawl.

It counts napalm and counts nuclear warheads and armored cars for the police to fight the riots in our cities. It counts Whitman’s rifle and Speck’s knife, and the television programs which glorify violence in order to sell toys to our children.

Yet the gross national product does not allow for the health of our children, the quality of their education or the joy of their play. It does not include the beauty of our poetry or the strength of our marriages, the intelligence of our public debate or the integrity of our public officials.

And it can tell us everything about America except why we are proud that we are Americans.If this is true here at home, so it is true elsewhere in world. ”

[Bobby Kennedy, Speech at the University of Kansas, 1968]

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What we call the Gross Domestic Product in the UK is the accepted measure of the wellbeing of our economy. There are other measures (e.g. in the USA, the Gross National Product) and, though these are calculated slightly differently they are based on the same assumptions: that economic wellbeing can be measured – and measured at a national level.

Well, Bobby Kennedy would argue with the first assumption (see above) – and he is, today, supported by growing numbers of economists, notably by Amartya Sen and Joseph Stiglitz (with Jean Paul Fitoussi) who strive to combine subjective measures of ‘happiness’ with hard economic data.

As economies have grown – but alongside expanding economic inequality – so we see growth in GDP but an erosion both of a sense and of a reality of wellbeing among populations. As inequities have grown, so GDP lies at a greater distance from real experience. This is for two main reasons: first, that increasing amounts of wealth are concentrated in ever-fewer hands under reducing-tax regimes; and, second, because what might count in economic/money terms as a gain may carry significant and counter-balancing losses. Sen, Stiglitz and Fitoussi say:

“The commonly used statistics may not be capturing some phenomena, which have an increasing impact on the well-being of citizens. For example, traffic jams may increase GDP as a result of the increased use of gasoline, but obviously not the quality of life. Moreover, if citizens are concerned about the quality of air, and air pollution is increasing, then statistical measures which ignore air pollution will provide an inaccurate estimate of what is happening to citizens’ well-being. Or a tendency to measure gradual change may be inadequate to capture risks of abrupt alterations in the environment such as climate change.”

One of the problems is that GDP measures only economic activity – not economic effects. It measures, for example, how services or manufacturing have grown or declined, but not what the effect of that has been on communities and populations – or, indeed, on the wellbeing of businesses, Here’s an example of what might be if these two things were to be combined. The UN developed a measure of economic inequality that is widely used to calculate the fairness in the spread of economic gains: what is known as the GINI coefficient (it was first proposed by an economist called Corrado Gini). In simple terms, this gives a measure – from 0 to 1 – of overall levels of equality in what populations earn: the closer a country comes to 1, the higher the level of inequality. In general, wealthy countries in the Northern hemisphere tend to score somewhere between 0.2 and 0.4, whereas poorer countries with less developed economies can score as high as 0.6 and more.

Now, if something like the GINI Coefficient were combined with a measure of GDP (or GNP), then we would have a better idea of how fair a growth (or a fall) in national wealth was. We might – probably would, in the present day – find that as an economy grows, so does unfairness. But we don’t do this, and so the Press and the Media report GDP as though growth were, in and of itself, a matter for celebration – and, conversely, decline is a matter for dismay.

GDP is a gross measure, it is coarse-grained and lacks the nuance and the complexity we need to properly represent real economic – not to say, social – experience.

As a final note, it is worth saying that the paradoxical combination of higher growth with higher inequalities has an illustrious history. Possibly the greatest influence on British economic thinking – greater, certainly, than John Maynard Keynes and even Adam Smith – has been that of Jeremy Bentham and John Stuart Mill – both early prototype economists and, in fact, moral philosophers. They were the patrons of what became known as Utilitarian theory. This was a theory of the economic wellbeing of society and this often entailed the view that what was good for the ‘common wealth’ was good for us all – so long as there was no collateral damage in terms of growing poverty with some people losing out. Here lies the source of Peter Mandelson’s famous (infamous) utterance that he was “intensely relaxed about people becoming filthy rich” (so long, he said, as they pay their taxes). Tony Blair and his administration (even Gordon Brown) took a Utilitarian view that, so long as no-one lost out economically, the richer wealthy people became, the better off society was. It was, for example, a sign that the country was competing better with other national economies. The high point of this belief lay in Ronald Reagan’s embrace of the ‘trickle-down’ effect – that wealth concentrated in the hands of a few rich people would ‘trickle-down’ to those lower down the economic ladder. Ever-wealthier people would invest more and more, creating more jobs and even charitable giving. Relative poverty (what a poor person earns compared to a wealthy person) was irrelevant; the important measure was absolute poverty– how much you actually earn compared with what you used to earn or need to earn. It has, to date, not been successfully shown that ‘trickle-down’ mechanisms work efficiently to share the proceeds of economic growth – or that they work at all.

So we can see that GDP (GNP) is a useful tool for some and for some purposes – but not for everyone and not for all purposes. Widespread use of the measure has certainly favoured the Utilitarians and those who believe that enriching the already wealthy is a good thing for all. That myth was laid to rest by the famous publication of the book Capital by Thomas Picketty, which showed definitively that as Capitalism has developed in modern times it has created both greater wealth and greater social and economic inequities simultaneously – Capitalism is not working for the good of all.

In the next Blog I will question why we still focus on national measures of economic wellbeing while local economies are so varied.